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  • KPMG LLP Credit Risk Management

    Practice 2014 Survey on Retail Loan Review

    Practices

    July 14, 2014

    kpmg.com

  • b | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

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  • Opening Letter

    Dear Colleagues:

    During the credit crisis, many financial institutions shifted the focus of their Retail Loan Review Functions towards identifying and enhancing loss mitigation strategies as well as conducting postmortem analysis on loan portfolios and related underwriting practices to identify the root causes of the high level of losses observed in the financial crisis.

    Now that economic conditions are improving, with relatively low credit losses amidst a slow economic recovery, banks are seeking to expand their retail lending products and market share. As such, Retail Loan Review Functions are starting to shift their focus towards evaluating retail loan growth strategies, the alignment of those strategies with the banks risk appetite, and obtaining a Strong rating for the Retail Loan Review Function from bank regulators. As we look to the next twelve months, banks will be focused on complying with recently issued regulatory requirements around mortgage products and ability to repay analysis.

    Given those industry dynamics, KPMG LLPs Credit Risk Management practice commissioned a survey of eighteen of the top (30) US banks, with $67B to $2.4T in assets to provide insight into prevalent and emerging practices for the Retail Loan Review Function. The survey covered the following topics, which are summarized in this white paper:

    Focus areas of retail loan review

    Planning, sampling, and portfolio coverage

    Data analytics and tools

    Professional resources

    We believe the survey results will provide readers with useful insights into current retail loan review practices.

    Sincerely,

    Mark Twerdok Partner T: 412-232-1599 E: [email protected]

    John Hale Principal T: 208-389-6511 E: [email protected]

    Ariste Reno Partner T: 312-665-1298 E: [email protected]

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  • d | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Table of Contents

    Executive Summary ...................................................................................................... 1

    Presentation of Findings ............................................................................................... 2

    Section 1 Survey respondent demographics .............................................................. 2

    Section 2 Focus areas of retail loan review ................................................................. 4

    Section 3 Planning, sampling, coverage ..................................................................... 8

    Section 4 Data analytics and tools ............................................................................ 11

    Section 5 Professional resources ............................................................................. 13

    Conclusion .................................................................................................................. 14

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 1

    Executive Summary

    Based on our survey responses and our experience evaluating retail loan review practices across many institutions, there are core practices that are common among most banks. In this white paper, we examine those core practices and discuss the ways in which bank practices are evolving to meet a changing regulatory and competitive environment. Within these core practices, we note a wide diversity of approaches that reflect the differences across financial institutions in risk management approach, institutional culture, and the delineation of activities that are within the purview of each Loan Review Function. This white paper provides insight into this diversity of practices and new perspectives on leading practices that banks can use.

    Our survey approach used a targeted set of questions to each of the 18 bank participants and allowed for follow-up and elaboration regarding leading and/or interesting practices. Our findings are presented in the context of the following topical sections:

    1. Demographics

    2. Focus areas of retail loan review

    3. Planning, sampling, and portfolio coverage

    4. Data analytics and tools

    5. Professional resources

    IMPORTANT Not all questions were answered by respondents, and while the responses are informative, they must be considered in the context of your banks risk management culture and the scope of activities for your institutions Loan Review Function.

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  • 2 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Section 1 Survey respondent demographics

    Retail asset size

    Practices often vary based on the size and complexity of the bank. To provide some perspective on the survey respondents, we stratified the banks into three categories:

    Small Greater than $10 Billion and less than $50 Billion in retail assets

    Medium Equal to or greater than $50 Billion and less than $300 Billion in retail assets

    Large Greater than $300 Billion in retail assets

    Total retail assets

    Small $10B and < $50B

    Medium $50B and < $300B

    Large $300B8

    4

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    Based on total retail asset size, six (33 percent) respondents are large institutions, four (22 percent) respondents are medium-sized institutions, and the remaining eight (44 percent) respondents are small institutions.

    As a result, the survey includes the practices of the largest and most complex organizations in the United States, while considering practices at a number of super-regional and regional banks. This approach gives you perspective on the full spectrum of leading practices around retail loan review.

    Presentation of Findings

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 3

    Organizational alignment

    Regulatory guidance addresses the need for independence of the Loan Review Function from the line of business as well as other constituencies that may impede the ability of loan review to execute its responsibilities effectively. Based on the results of the survey, we note that roughly half of the respondents (10) are located within the Risk Function, while the remaining eight (8) are aligned with the Internal Audit Function. In addition, the majority (9 out of 10) of respondents aligned with Risk noted a direct reporting relationship to CRO. The majority of respondents (14 out of 18) indicated that they have a dotted or direct line to one or more committees of the board.

    Total retail assets

    Small Medium Large0

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    Audit

    Small $10B and < $50B

    Medium $50B and < $300B

    Large $300B

    Of the 18 respondents:

    Three noted that they changed organizational alignment within the last two years. One respondent moved from Risk to Internal Audit, while two moved from Internal Audit to the Risk Function.

    Two respondents indicated they recently (within the last three years) established their Retail Loan Review Function.

    Key takeaways

    Based on our discussions with the survey respondents and the results above, it is clear that there is not a single standard for organizational alignment. We observed organizations that worked well with alignment to the Risk Function and others that worked well with an alignment to the Internal Audit Function. The key observation was that having retail loan review reside in the Risk or Internal Audit Function appears to work equally well for achieving independence. The decision to align Retail Loan Review with either Risk or Internal Audit was more a function of the overall culture of the organization and where Retail Loan Review will have the most effective mandate to effectively execute its responsibilities.

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  • 4 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Section 2 Focus areas of retail loan review

    For the first few years of the financial crisis, most respondents indicated that they had shifted the focus of their Retail Loan Review Function towards identifying issues and enhancing strategies for loss mitigation. Other focus areas included conducting postmortem analysis on loan portfolios and related underwriting practices to identify root causes of the high level of losses observed in the financial crisis. We note that in the view of several respondents, the credit crisis was an opportunity to reposition retail loan review as a strategic partner to help ensure that the banks underwriting and risk management processes aligned with the overall risk appetite and tolerance of the organization.

    A theme across the institutions that fared relatively well during the crisis was the ability to maintain a dual focus on business as usual and the elevated level of ad hoc activities required by the changing dynamics and market conditions during the crisis. These needs included responding to increased demand for ad hoc reporting, deeper analytics, and expanding ongoing reporting requirements, both in frequency and depth. Those institutions that lacked sufficient resources struggled to keep up with those competing demands.

    Most institutions noted a tightening of credit and either one or all of the following actions once the credit crisis began:

    Shifting focus to loss mitigation and default management strategies and processes

    Shifting focus to analyzing what went wrong and why, as well as how to move forward with the right strategy to ensure profitability and adhere to risk tolerances

    Remediating issues in credit policies and/or processes along with controls.

    Based on our discussion with respondents, more recent and go-forward focus areas for a majority of respondents include evaluating retail loan growth strategies and alignment with the banks risk appetite, addressing specific regulators, and obtaining a Strong rating for the Retail Loan Review Function from the OCC. The retail loan review focus areas that we discussed with respondents are covered in greater detail below.

    Growth and risk appetite

    For the most part (13 of 18 respondents), banks are shifting back toward a growth mandate with a focus on originations as banks take on the challenge of achieving revenue growth goals in the current environment. Those institutions that are focusing on growth mentioned opportunities in indirect auto, credit card, home equity and line of credit (HELOC), and student lending. Most institutions said that growth would be conservative and within their organizations established risk tolerances. A few respondents indicated they planned to grow primarily within their existing customer base (by increasing wallet share), or reintroducing nonsubprime customer profiles that the bank may have dropped due to the credit crisis. For those institutions, the Retail Loan Review Function is tasked with monitoring that shift through review of growth strategies (products, markets, models, and thresholds) and their impact on performance.

    Key takeaways

    Based on discussions with survey respondents as well as our knowledge of industry practices, proactive involvement by the Retail Loan Review Function in evaluating growth strategies and monitoring performance is a common risk mitigation technique. In particular, we note that banks are evaluating growth strategies using a range of techniques, including monitoring new accounts from

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 5

    the growth strategy population for trends in delinquencies, losses, early defaults, first missed payment, heavy utilization (credit card), etc. More advanced techniques include running loss projections using existing models based on growth strategy customer profiles and early performance behavior. Depending on the results, Retail Loan Review will be in a strong position to effectively challenge the lines of business and risk management on growth strategy decisions.

    Specific mandates and new regulatory requirements

    Over half of the respondents mentioned heightened focus on specific regulatory requirements. Nearly half (7) of the respondents identified complying with the new mortgage regulations as an area of focus. Respondents are working to meet new requirements for Qualified Mortgages, Ability to Repay (ATR), Home Equity (HE) end of draw, and servicing challenges.

    Additionally, six respondents noted ongoing efforts to address bank-specific regulatory guidance and/or bank-specific mandates (such as Matters Requiring Attention (MRA)), or other identified areas of improvement). Several respondents anticipate heightened regulatory attention on real estate appraisals and valuations as housing prices continue to rise as well as increased regulatory scrutiny for vendor management.

    Key takeaways

    Given the recent increase in consumer lending regulations and continued focus on real estate, staying abreast of regulatory developments is essential. Being flexible in regards to the scope and timing of loan review examinations as new regulations are promulgated and enforced will allow banks to actively identify credit process issues across the mortgage credit life cycle.

    As noted by the respondents, implementation and monitoring of compliance with regulatory requirements is the functional responsibility of the Regulatory Compliance area; however, Loan Review Functions should be very familiar with evolving regulatory requirements, aware of the implementation approaches in the organization, and should understand the potential impact of the specific regulatory requirements on the risk profile of the banks loan portfolios and the banks ability to realize its growth strategy.

    Typically, the Loan Review Function ensures that various regulatory requirements are being met as part of process reviews but may also find issues while reviewing individual files. Depending on findings from these activities, as a leading practice, the Loan Review Function will alert its Regulatory Compliance counterparts in the organization as well as make senior management and the board aware of any issues.

    Model review

    From the banks surveyed, there was a trend towards decreasing consideration of model risk management activities, in part due to the development and expansion of independent model risk management functions as well as increased management comfort around model performance after the credit crisis. Thirteen of the eighteen respondents noted they still have some involvement with reviewing quantitative models for applications such as Basel, Allowance for Loan and Lease Losses (ALLL), and Comprehensive Capital Adequacy Requirements (CCAR). However, respondents noted that their focus has been shifting away from more comprehensive reviews toward focusing on model assumptions and model use in evaluating origination and account management strategies.

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  • 6 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Key takeaways

    While there is a trend toward less involvement in directly reviewing models, many survey respondents noted that their involvement in model review includes participating in model risk management or model review committee meetings as well as review of model validations performed by others for alignment with OCC 2011-12 and SR 11-71 requirements.

    As a leading practice, Retail Loan Review should assess the impact of new models, model changes, and model validation results on downstream strategies, business line and risk management decisions, and evaluation of loan portfolio risk in their scoping and planning activities. If significant issues are identified, Retail Loan Review professionals should notify senior management and the board of their concern as well as request and monitor remediation plans from those responsible for model development, model validation, and model approval.

    Obtaining a Strong rating

    Most survey respondents are regulated by the OCC and are being held to Strong standards as are the institutions they support; however, only three respondents indicated that they recently received a Strong rating for their Retail Loan Review Function. Others noted that while the requirements for getting to Strong have not been clearly articulated, the regulators appear to be more willing than in the past to provide clarity to organizations around what specific actions are needed to reach a Strong rating.

    Key takeaways

    Based on our discussions with the respondents, we noted the following standard practices that were observed.

    1. Completing their own self-assessment

    2. Identifying gaps and remediation plans

    3. Developing a scorecard methodology to measure progress

    4. Producing reporting to enhance dialogue with regulators regarding progress and where they stand along the spectrum of capabilities

    Loan Review Functions that have not started a more formal effort to attain a Strong rating should consider implementing a focus effort to achieve a Strong rating. We recommend scheduling frequent updates with your regulators, if you are not already meeting with them on a regular basis, to discuss key considerations viewed by the regulators as critical to attaining a Strong rating including:

    Independence and effective challenge

    Functional independence from the line of business and risk management

    Direct access to the board for reporting results that incorporate emerging issues and trends, risk concentrations, portfolio quality impact of growth strategies, identification of root causes, and alignment with risk tolerance thresholds

    1 OCC 2011-12: Supervisory Guidance on Model Risk Management, April 4, 2011, and SR 11-7, Guidance on Model Risk Management, April 4, 2011

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 7

    Board and senior management reliance on Loan Review Function assessments and conclusions

    Ability to provide credible challenge to the line of business and risk management decisions

    Ability to effectively influence lines of business and risk management to acknowledge issues and require development and implementation remediation plans

    High-quality resources and skills

    Competence and skill sets of Loan Review Function professionals align with the risk profile and complexity of the organization

    Track record in effectively assessing asset quality, process, policies, procedures, reporting and key controls

    Proven ability to execute annual plan, issue timely reports, follow for remediation actions, and adjust scope, cycling, and resources as new issues emerge

    Proven capability to attract, motivate, and retain qualified resources

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  • 8 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Section 3 Planning, sampling, coverage

    Risk-based planning

    Based on our discussion with the respondents, most Retail Loan Review Functions continue to use proven tools for planning and sampling. Nearly all respondents (16) use a risk-based approach for determining their loan review plans and periodic intervals for portfolio review (exam cycling). The majority (13) of respondents are cycling exams over periods longer than one year, with the typical time between reviews ranging from 18 to 48 months.

    Key takeaways

    Risk-based planning and cycling of exams depends on Loan Reviews ongoing risk assessment of portfolios and their supporting risk management functions, changes in bank strategy, and external environment. Based on discussions with survey respondents as well as our knowledge of industry practices, the following are considered standard practices in this area:

    Updating portfolio risk assessments quarterly

    Ensuring that no longer than 36 months passes between exams for any portfolio (12 months for high-risk portfolios)

    Performing deeper dive assessments on areas identified as emerging or higher risk areas.

    The risk-based approach for most respondents involved evaluation of a combination of factors including:

    Previous loan review rating

    Inherent risk in the portfolio

    Trends in the level of risk and key risk metrics

    Changes in markets, products, policies, process, or management

    Results from continuous monitoring

    External data (peer benchmarking and macroeconomic variables).

    Based on discussions with respondents, the type and number of factors considered and methods used to combine the factors in the risk-based planning exercise vary significantly across Retail Loan Review Functions. Additionally, the majority of respondents (14 out of 18) use the work of others (Internal Audit, Compliance, Model Validation, Quality Assurance, etc.) to help identify areas of focus and to eliminate redundancy in reviews as they perform their risk assessment and planning process. A subset of respondents (3) also used statistical techniques and/or scorecards to more formally combine risk factors and judgmental overlays in the risk-based assessment and planning process.

    Based on our experience, the most effective approaches use standardized metrics and data alongside management expertise and institutional knowledge. Those institutions that rely solely on metrics or management judgment alone may miss early warning signals around issues in the portfolio.

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 9

    Sampling approach and sample size

    Banks use a wide range of judgmental and statistical approaches (including a combination of both) to determine retail loan review samples.

    Four respondents noted they use a purely judgmental approach for sample selection.

    Four respondents use purely statistical methods for sample selection. Of those four, all use the confidence interval (CI) and error rate approach with either a 90 percent or 95 percent CI.

    Six respondents noted they use a combination of statistical methods with a judgmental overlay to select their samples.

    While none of the respondents noted specific minimum sample coverage targets, several respondents described judgmentally determined sample sizes that have been used historically as a starting point, ranging from 35 to 150 files per portfolio based on the size, complexity, and variation in loan structures within the portfolio. The Loan Review Function would then determine if increasing the sample size was necessary based on results from the initial sample and identified areas of risk.

    Key takeaways

    Based on discussions with survey respondents as well as our knowledge of industry practices, using a combination of statistical and judgmental sampling approaches is viewed as a leading practice. The combined approach involves statistical sampling, results of which can be extrapolated across the larger population, along with incremental judgmental sampling to target loans with higher risk.

    Per regulatory guidance2, typical samples reviewed by the Retail Loan Review Function include:

    Recently approved accounts to assess adherence to underwriting policy, with both automated and nonautomated approvals

    Recent override loans to underwriting policies to evaluate the adequacy and consistency of the judgmental decision process

    Loans that were 60 days or more delinquent two months ago and are now current to determine whether the customer cured the delinquency through payments or if the account was extended or reaged and complied with the Federal Financial Institutions Examination Council (FFIEC) Uniform Retail Credit Classification and Account Management Policy

    Loans that were recently extended, deferred, renewed, or rewritten for compliance with bank policy and reasonableness

    Recently charged-off loans and borrower, payment, and collection history to determine whether the actions taken pre-charge-off were reasonable or if the practices had the effect of deferring losses.

    Per the Sampling Methodologies Comptrollers Handbook, samples that are smaller than 30 loans cannot be used to make projections about the larger population.

    2 OCC Sampling Methodologies Comptrollers Handbook, August 1998 and Retail Lending Examination Procedures Comptrollers Handbook, December 2004, which suggest that banks have a minimum sample size of 30 loans per portfolio by major risk attribute and expand the sample size if necessary based on results from the initial sample.

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  • 10 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Continuous review activities

    All respondents indicated that they perform some form of continuous review activity, which is a leading industry practice, but approaches vary widely among respondents. Common continuous monitoring activities include:

    Attending committee meetings

    Meeting with business line and risk management

    Reviewing reports produced by business line and risk management

    Creating independent trend analysis, heat maps, or risk assessment tools

    Transaction testing (including full population testing) outside of a normal exam.

    More advanced practices consist of quarterly updates to the Loan Review Functions risk assessment tool (if in place) and total population testing for exceptions, loans outside of policy, etc.

    If higher risk areas are identified in the course of continuous monitoring activities, the majority of respondents (13) take action, including:

    Adjusting the loan review plan and schedule to accelerate review of indentified risk areas

    Adding a targeted review

    Pulling a sample for immediate transaction testing.

    Key takeaways

    Based on our knowledge of industry practices and discussions with respondents, continuous monitoring is a leading practice with the most common continuous monitoring activities aligned with the practices noted above. As banks identify new or emerging risks through continuous monitoring activities, leading practices suggest assessment of the identified risks potential impact on loan portfolio performance and addressing the issue through one of the actions listed above. While the action taken depends on the perceived size and severity of the risk identified, the most common actions taken are adjusting the loan review schedule to accelerate review or adding a targeted review. Pulling a sample for immediate transaction testing is generally reserved for identified issues deemed very high risk.

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 11

    Section 4 Data analytics and tools

    Data analytics

    In its purest form, data analytics is generally defined as the science of examining raw data with the purpose of drawing conclusions about that information. During discussions with respondents, it became evident that interpretations of what constitutes data analytics within the Retail Loan Review Function differ widely. Acknowledging the differences in interpretation, we did not restrict respondents to a definition of data analytics, as we believed that this allowed us to gain insights into overall data analytics and data evaluation practices. Respondents offered a broad range of the meaning of data analytics as noted in the responses below.

    Many respondents noted one or more of the following fundamental uses of data analytics:

    Reviewing and opining on reports, analyses, and trends produced by business lines and risk management

    Creating samples for transaction testing/file review

    Manipulating underlying data of reports and analyses created by business lines and risk management for additional analysis

    Extracting raw data from source systems, with technical manipulation of data for samples or analyses

    Validating reports from the business line and risk management.

    Others noted more advanced uses of data analytics:

    Creating independent trends, analyses, and reporting

    Developing risk heat maps and/or risk and portfolio quality assessment tools

    Assessing business and risk management strategies and decision thresholds

    Improving targeted sampling selection through deeper dive analysis

    Automating review processes including full population testing for exceptions and thresholds.

    Key takeaways

    Leveraging data analytics in the context of Retail Loan Review is more than just analyzing reports; it is about integrating the full value of the data the Loan Review Function is capturing, transforming it into actionable information, and then using that information to drive key risk decisions and assessments. While many institutions use data analytics in the loan review process, the challenges across the industry include:

    Each banks cultural views on the incremental value of independent analytics created by the Loan Review Function

    The ability to invest in technology and resources to facilitate greater use of data analytics by the Loan Review Function

    Finding ways to use existing data analytics to more efficiently identify issues and allocate resources to higher risk areas.

    While respondents are generally relying on the underlying data from reports provided by business lines or risk management or separately obtaining data extracts from source systems to drive key risk decisions and assessments, more than half of respondents are performing some type of ad hoc analyses. Based on our knowledge of industry practices, performing ad hoc analysis is a leading industry

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  • 12 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    practice and many respondents noted they will perform ad hoc analyses when they believe business line risk management has not considered a potential high-risk segment, an emerging trend, whether internal or external, and changes to the strategy that could impact the risk of a portfolio.

    Tools and techniques used for data aggregation and spotting trends in retail portfolios

    Based on respondents varying interpretations of data analytics, the interpretation of data aggregation ranged from gathering underlying data in reports produced by business line and risk management to more complex data extracts from origination systems, systems of record, and global data warehouses. Many respondents have Data Analytics Teams within their Retail Loan Review Function, which execute any data extracts and queries for respondents using SQL, SAS or CAAT (computer assisted audit techniques). For those institutions without dedicated data analytics resources, some still pull data independently from the source systems, while others are reliant on requesting extracts from business lines and/or risk management.

    For spotting trends, Excel remains the most commonly referenced analysis tool; however, SQL, Minitab, SAS, Tableau, and similar tools are being used by some respondents for trending analysis and automated population testing against flagged criteria.

    Internal tools noted by respondents range from heat maps, which reveal trends in key metrics, to more sophisticated risk assessment tools and scorecards, which take into account additional data like peer benchmarking. These risk tools are used to inform management, plan reviews, and stay on top of emerging risks.

    Key takeaways

    Although many banks have developed data analytics teams, we found that many teams are understaffed relative to the banks needs. As a result, most institutions remain dependent on business line and/or risk management reports to identify risks for many portfolios.

    Based on conversations with respondents and our industry experience, some banks are taking on what KPMG would consider emerging or advanced techniques for data aggregation and spotting trends. Noteworthy emerging techniques include analyzing portfolio trends and results independently from the business and/or risk management with independently sourced data; development of risk assessment tools and scorecards, which include external and macroeconomic data; and automated population testing against flagged criteria. KPMG notes that advanced tools are becoming more user friendly, and include benefits such as:

    Eliminating reliance on other areas for data extracts, thereby increasing independence

    Increasing consistency in evaluation of parameters with automated methods standardized criteria fashion versus more variation in judgmental review of reports and analyses

    Increasing efficiency by allowing for targeting of areas of concern more quickly and augmenting or replacing a portion of manual file reviews with automated population testing against predefined criteria.

    While there are many benefits associated with adopting advanced or emerging techniques discussed above, KPMG notes that the use and effectiveness of these types of advanced data profiling and risk trend identification tools are highly dependent on the underlying data quality within each organization.

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 13

    Section 5 Professional resources

    While most respondents noted they are currently fully staffed, they also noted a number of challenges in securing and retaining talent:

    Finding candidates with both credit and business skills

    Augmenting skill sets as the requirements for retail loan review continue to expand

    Retaining strong candidates who have a number of other opportunities.

    Respondents prefer candidates with a combination of credit and business skills. In addition to general credit risk experience, an understanding of retail business processes, operations, compliance requirements, retail underwriting, portfolio risk management, and loss mitigation experience were all noted as important. Those skills enable staff to understand the full range of challenges the business lines and risk management face and make retail loan review evaluations and recommendations more effective.

    When discussing ideal noncredit skills needed, respondents indicated critical thinking, broad vision, and a holistic approach to solving business problems as necessary to lead reviews, challenge business lines and risk management, and provide effective evaluation. Project management skills were also noted as critical, including planning, execution, and reporting that are required in order to successfully lead a review.

    Key takeaways

    Based on our knowledge of industry practices and discussions with respondents, the caliber and mix of professional resources remains critical given the Loan Review Functions role in each banks control structure and line of defense for managing risk. The most common focus areas relative to staffing and professional resources relate to ensure that:

    1. Staff capabilities are aligned with the complexity and risk profile of the bank

    2. The Retail Loan Review team possesses the right blend of deep skills and knowledge in underwriting, monitoring, and portfolio management and collections/remediation

    3. The level and depth of resources exists to achieve plan and meet the evolving needs of each bank

    4. Adequate incentives are in place to attract and retain qualified resources

    5. Sufficient understanding among loan review resources exists around model risk management concepts and the related impact of model risk on portfolios as models become more prevalent within organizations

    6. Appropriate level of analytical capabilities are in place to effectively challenge information provided by other parts of the organization and ensure independence in views of risk.

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  • 14 | KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices

    Conclusion

    Given the current point in the credit cycle, with banks seeking to grow amidst regulatory concerns over loosening underwriting practices, the Retail Loan Review Function remains a key control for protecting the stability and reputation of financial institutions.

    KPMG expects that regulators will continue to evaluate the Retail Loan Review Function according to core criteria including the functions stature and independence within the organization, staff experience, and ability to meet annual objectives and plan, respond to regulatory requests, effectively address identified issues and follow for remediation, and monitor risk.

    While the fundamental activities in Retail Loan Review Functions are similar in concept across most of the banks surveyed, the survey results suggest that implementation and individual practices vary widely. The variation in practices and implementation depends on the relative maturity of the Retail Loan Review Function, culture and alignment within the organization, as well as the specific scope of activities within the purview of each banks Retail Loan Review Function.

    About KPMGs Credit Risk practice

    KPMGs Credit Risk professionals provide clients with a full range of credit risk management and operational improvement services by:

    Providing outsourced and cosourced retail and commercial loan review services. As part of loan review assessment engagements, KPMG has assisted many banks in developing scorecards that combine key risk metrics, portfolio data, and ways to consistently incorporate expertise and judgment for the risk-based planning process.

    Helping organizations align their credit risk methodologies, processes, and tools with leading industry practices and regulatory guidance

    Assessing how loan review methodologies, processes, and tools align with internal requirements and established risk tolerances, leading industry practices, and regulatory guidance

    Providing model and methodology assessments including model validation services for the Allowance for Loan and Lease Losses (ALLL), risk rating systems and scorecards, stress testing, and capital planning exercises

    Offering services to help assess and build your risk data governance framework, infrastructure, processes, and controls as well as your data quality and data aggregation capabilities.

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  • KPMG LLP Credit Risk Management Practice 2014 Survey on Retail Loan Review Practices | 15

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  • Contributing Editor Ben Hoffman

    The views and opinions from the survey findings are those of the survey respondents and do not necessarily represent the views and opinions of KPMG LLP. Certain of the Advisory services described herein are not permissible to KPMG audit clients and their affiliates.

    The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

    2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS 271671

    For more information, please contact one of the KPMG professionals below.

    Mark TwerdokPartnerT: 412-232-1599 E: [email protected]

    John HalePrincipalT: 208-389-6511 E: [email protected]

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